In three installments, I will share three Employment Contract Terms that benefit Payroll and HR, and Finance as well.
Tip 2: Do not guarantee net salaries in employment contracts.
Generic High Tech Inc., a hypothetical company, is entering an Eastern European country for the first time. General Manager, Pete, finds the perfect candidate, Svetlana. Svetlana reviews the contract and makes a change to her salary from gross to net. Pete asks why, and Svetlana tells Pete that this is usual practice in her Eastern European country. She also points out that the contract is fixed for two years, and she wants to know exactly what she will be paid. Pete is concerned and he knows Sophie, the payroll director, to be savvy about employee pay. He shows Sophie the contract, as well as Hugo, the HR Director.
Sophie and Hugo tell Pete: Do not accept a net salary in an employment contract. Why not?
- HR will not have a gross salary to enter in the global HR system until after payroll in processed.
- Payroll will have an exception. All other employees globally at Generic High Tech are calculated as gross to net.
- Finance will see a higher employer cost because the employer is paying the employee’s personal liabilities for statutory payments.
- Svetlana’s gross salary will rise when there are changes in taxes or she moves into higher tax brackets.
- If the business is a success and the employment in the country grows, every new hire who will demand a guaranteed net salary. Employment law within the country may back the employees on this.
Therefore, don’t set a precedent. If you have this situation now, it may be painful but possible to change the contracted salaries from net to gross for everyone. In practice, this has been successful at organizations that bring everyone globally in line to be paid gross and not net.